Small Business Articles

In this article, I'll have a go at explaining a measure of business efficiency which I heard described by Nic Rixon (if you ever get a chance to see this guy, do it) in a business growth seminar, which he calls a "Run Rate". The term Run Rate is normally used to describe a company's revenue extrapolated over time, but as I can't find another term for this measure I'll use Run Rate for now.
Imagine if everything was running at maximum efficiency. If you charge by the hour, this means every employee who does chargeable hours is working all day every day. Enough sales are being made to keep everyone busy, client expectations are managed so they don't keep calling, maintenance is low because quality is high, cash flow is easy because prices are right, and staff are productive because they know what needs doing, and have the tools to do it. Perhaps you're purely selling time, in which case imagine you could work chargeable hours every day. What would your sales figure be? Put a realistic number on it.
Now, what are your sales currently? Take the past 6 months, for example. Perhaps discount any abnormal windfalls or writeoffs, unless they happen regularly. Divide that by the previous figure for the same time period. For example, if you did £50,000 in the past 6 months, but you could potentially be doing £15,000 per month, then you could potentially have done £90,000 in the same time period. £50,000 / £90,000 is 0.55, or 55%.
The result (as a percentage) is your "run rate" - the ratio of actual sales to potential sales, and therefore a measure of how efficient the business is. Shocked at your figure? A well-run business can achieve a run rate of 70% or more - 100% is impossible to achieve because there are always unexpected problems, but if everything is working well, recurring issues are designed out or priced in, and the sales are coming in, most businesses can achieve 80%.
A run rate of under 45% is likely to lead to cashflow problems, simply because your expenses plus cost of sales are likely to be at least that proportion of turnover, which leads to hand-to-mouth cashflow. In hindsight, I can find several stages of different run rates in my first business:

Initially as a 1-man-band, it was around 20%, for two reasons - I was terrible at estimating time (pricing too low), and focussed only on doing the delivery work (poor credit control). At one point I couldn't afford to buy food, yet my future wife found £3000 worth of services I had not invoiced - just one of the many reasons I married her!

Later, with staff and two very experienced mentors, both these things were controlled and the run rate grew quickly to around 60% and for the first time, I could take a salary.

Towards the end, with more staff, a bigger office, customers dropping off due to the recession, and my time almost fully occupied by one customer, I lost some control and the run rate dropped to around 40%.

When your run rate is climbing above 70%, consider expanding. Taking on an office and more staff expanded the capacity of my business, but consider what it did to the run rate - suddenly there was a lot more capacity, but the extra sales aren't there straight away, so the run rate dropped dramatically. That drop has been responsible for many companies collapsing, particularly in the past few years when sales and therefore run rates have grown slowly, or even dropped.
If you're running a business that revolves around your technical skills, and you want to grow your income, make sure you learn to grow your business, and keep measuring it - eventually you'll get an instinctive feel for where to focus resources and how to increase profit.[+]

A very perceptive lady once told me, at a difficult time in my life, "If things aren't going the way you want them to, change something." It sounds obvious, but those words stuck with me - the key point being that I needed to change something, not just mope around hoping something would change.
I recently had, thanks to that wedding and a few bank holidays, an 11 day break from work. It was great to stop and relax for a while, but I hadn't properly planned for it work-wise. Although I was able to keep my customers happy, I still ended up with a mountain of overdue tasks. Worse still, I felt unable to tackle the mountain and completely lacking in inspiration and drive, despite being in the most rewarding and exciting time ever in my career.
Those words, spoken around 8 years ago, came to mind and chimed with a book I recently read, :59 Seconds by Richard Wiseman. The book details various scientific studies into how people work, with results that are surprising and simple to act upon, including some on enhancing the creative part of the brain. It boiled down to the need to re-focus the mind, distracting the conscious mind and allowing it to chip away at problems subconsciously. This relates well to another part regarding habits, which talks about the need to 're-write' the well-worn and comfortable paths your thoughts take by changing some small aspect of what you're doing.
I decided to try something very simple; to literally just "do something different." Anything to push me out of the daily, weekly and monthly habits and routines that I realised were stopping me from getting things done. I'm sure you know the kind of habits I'm talking about - checking email every few minutes, flicking on to your favourite news or social website, chain-drinking tea or coffee; I'm sure you also know that these habits and routines can be deceptively time-consuming because your mind is constantly switching between contexts, which takes a few minutes.
I'm useless at breaking habits by will-power alone, so I reasoned that even if my 'do something different' was completely unrelated to the tasks I wanted to do, it would still have a positive impact on my productivity and creativity.
I set about making a list of 'different' things that I could do - some for a day, week or month, some one-off. Here are a few of the items:

Go for a walk in the evening instead of whiling away the night in front of mindless TV

Play a board game with the family

Watch a film (something I very rarely do)

Eat only fruit all day (yes, I have odd eating habits)

Run 2 miles every morning for 2 weeks (I'd been doing just 1 mile)

Go completely offline for 4 hours and plan out the next few years

Learn to cook a proper meal (a shamefully rare occurence)

Learn some basic Chinese

Learn some new songs on piano

I've ticked off a couple of those already, and can (unscientifically) say that it's improved my creativity and productivity dramatically. I still 'fall off the wagon' and have slow days, but if I realise that's happening I try to stop and change the scenery or take a short break. However, I've started and in some cases finished a few jobs that I was struggling with, kick-started one of my sidelines after it had fallen by the wayside a bit, and even done some of those 5-minute jobs that I'd been putting off for months.
Go and do something completely different for a short while, then get back to that to-do list with a fresh mind. Tweet me @johnorourke if you did something wierd or interesting.[+]

There are thousands of "how to set up a business" guides out there, but most of them focus on the intangible things - planning, marketing, sales and growth. Having been through the process a few times I wrote myself a small procedure or checklist for the more practical aspects of setting up a new company - what actually needs to happen. It's not difficult, but first time around I missed a few of these steps and suffered extra admin work and in some cases costs as a result.
So here's what I'm going to assume you, being sensible, have done before you even think about forming a company:

realised you have a product or service that can be sold for money

checked that there are enough people who would actually buy it

worked out how you would deliver it, and how much it will really cost to do that

worked out an agreement with any business partners

checked that any suppliers are in place and what their prices would be

choose a name, making sure the URLs ("domain names") you want are available (I recommend .co.uk for a UK business but try to register the .com as well, if available)

search for the name on Google (put quotes around it if using multiple words) and see what other people are using that name for - make sure no competitors have the same name

for a UK business, make sure the name is free at Companies House if you're setting up a Ltd company

register the domain name(s), for example with 123-reg.co.uk registering them as personal domain names at your home address for now

set up an email address for yourself - eg. YOURNAME@

set up email aliases to use - info@, sales@ and accounts@ will do

set up the Ltd company - don't use your accountant and don't fill in paper forms - the simplest option is to use an online service such as companyregistration.uk-plc.net who offer a same-day service in most cases. Register everything to your home address initially.

now that you have the company registration details, set up a bank account - most banks are offering free or nearly free banking for startups, and generally you'll get a current account and a savings account

if you will be selling to the public straight away, apply for VAT registration - you can do this online. Set your registration date to be when you realistically expect to start trading

register with Companies House Webfiling service, using your company authentication code provided when you registered the company - it will ask you if you want to register for PROOF, which you should do - this prevents people from filing fake paper documents

set up a bookkeeping system. Don't bother with Sage, it's far too complex and unwieldy. If you want a simple, easy to use Windows-based single-computer solution, VT is the bookkeeping system you want. However I would strongly recommend going for an online solution such as Kashflow for book keeping - very easy to use, automatically email invoices, good online help and the best part is that your accountant can also log in to do your year-end accounts

get an accountant - even as a startup, having an accountant will help ensure you pay the right amount of tax and submit the correct documents to companies house on time. I recommend MacMahon Leggate for accountants in Burnley.

get a basic website set up. Give yourself a head start and set up the site with Wordpress - most ISPs will provide an option in your control panel to install this easily. There's a great wordpress user guide and training courses available from Interconnect IT, but the user guide is plenty to get you started. Choose a free theme and add a few pages about the business and some contact info

set up a Google account and then register with Google Analytics, Google Webmaster tools

At this point I'll stop the "setup" list, because we're moving into marketing which is well covered in many online tutorials.
Once the business has made a bit of money, there are a few things you can do to help it along. Let's assume again that you've got the intangible things covered, such as:

a solid, measurable marketing plan

good customer relationships

quality control of the service or product

a plan for growth

legal help with staff hiring

The practical things you can do at this stage are:

register a trademark for your company and/or product name

if you have created or are creating something unique, ask your accountant about Research+Development tax relief, and consider applying for a patent if you have enough funds

register some more domain names - variations on your company name, product names - and redirect them to the appropriate page on your website, or set up a "micro site" for specific products and services if you have a wide range

document the sales, delivery and customer services processes to help you get away from day to day operations and make staff more self sufficient

That'll do for now. I'm in the process of building my 2nd, 3rd and 4th companies so I'll try and come back to this list as I learn more.[+]

There is some risk in writing an article like this. It discusses pricing for professional services; getting it wrong in either direction can cause problems for the supplier, customer or both, and the risk is that the problems and solutions outlined are misunderstood. However, the principles I'll describe below ultimately benefits the end customer, and so I hope it will educate and inform, and so in turn benefit more end customers.
This all starts with a few assumptions. Based on 8 years of quoting for and delivering fixed-price creative work, I have found that customers who buy design (eg. web design, graphic design) or development (software development, web development) work for a fixed price think that most or all of the following are true:

the quote reflects a specific number of hours work

reducing the requirements will reduce the price

all of the hours charged for are spent actually doing the graphic design, programming, or whatever skilled work is being charged for

the price is equal to number of hours multiplied by a fixed hourly rate

Many web designers, graphic designers, developers and consultants start out in their business also believing that these things are true. However, within 1-2 years it becomes obvious (usually when the bank account is empty) that these things are not true.
Let's work through a few examples and find out where this model breaks down, and why so many creative professionals struggle to build a viable business.

Why Price is not related to Time

Meet Danny. He's a graphic designer who's just bought a shiny Mac, picked up a 2nd hand copy of Photoshop from eBay, printed some business cards, and built himself a flashy website. Let's walk through a few example customers at various stages in the life of Danny's small graphic design business.

Example 1: Danny thinks he's earning £25/hour, but it's actually £14.

Jimmy asks Danny to quote for designing some business cards. He's a friend of a friend so is expecting a keen price, and Danny is eager to get some business in. Danny reckons his previous salaried job paid £10/hour, and he knows some designers charge £50/hour, so he tells Jimmy it'll be £25/hour. They have a chat on the phone, agree that hourly rate and roughly what design features Jimmy wants. Danny considers how long it'll take to knock something up in photoshop and quotes Jimmy 4 hours. Jimmy, being an experienced buyer, says "oh come on mate, surely it won't take that long to push a few images around in photoshop?", and wanting to please him, Danny says "yeah you're probably right, it shouldn't take more than 3 hours".
Danny manages to end the phone call after 40 minutes, then makes a coffee and starts flicking through stock photos and images that will give fit in with Jimmy's requirements. He spends a few minutes reading an email from Jimmy with even more detailed requirements, realises it will take a bit more time but feels "bad" about going back to Jimmy to re-quote, so he reasons that "it won't take that long, maybe 10 minutes more so I'll stick with the quote".
He then needs to go out for a while to attend to something else, comes back to his desk and takes a bit of time to get the ideas flowing. Within an hour or so he's emailed Jimmy a couple of design ideas.
Several hours later Jimmy replies, very happy but with a few comments and changes, and Danny happily throws himself back into the work. 5 minutes later the phone rings - it's a different customer and Danny has to talk to them for 20 minutes about their project. They're unhappy about several things and after the call Danny feels completely deflated. He keeps pushing ideas around on the screen for Jimmy's cards but is worried about the other customer's job and can't focus. He fails to achieve anything for the next hour.
The next day he feels better and gets on with Jimmy's cards, and within half an hour has emailed Jimmy a final design for approval. Jimmy phones up and raves about how great it is and how there will be plenty of work in future, for 20 minutes, and Danny then spends 20 minutes getting the file in a print-ready state, then uploads it to the local print shop. He pays for the cards to be delivered straight to Jimmy.
He then emails an invoice to Jimmy for £25 x 3 hours. Having only recently started his business, he's got other projects to focus on, and doesn't think any more about the invoice until 4 weeks later. He's a bit nervous about chasing money so emails Jimmy a very polite reminder. Fortunately Jimmy has simply overlooked it, and emails back to say he's out of the office but will put a cheque in the post. A week later Danny is wondering where the cheque is, and after a couple of phone calls Jimmy finally posts a cheque. Danny then spends 20 minutes posting the cheque to his bank and updating his accounts system.
Now for the sum: Danny quoted £75 for the work, and it's true that he only spent 3 hours actually doing the design work. Let's look at how much time Danny spent which, if the job did not exist, would not have been needed: 40 minute call, 10 minutes thinking/coffee, 10 minutes email, 1 hour focussed work, 1 hour unfocussed/wasted, 30 minutes focussed work, 20 minutes call, 1.5 hours sending, chasing, and processing payment. Total time taken up by the job: 5 hours 20 mins, so Danny's real hourly rate was just £14/hour - just over half the rate he thought he was earning, and he had to wait 6 weeks for the money.

Example 2: Danny quotes at £30/hour but makes a loss

Danny has learned from his past experience and is now quoting at £30/hour. However his outgoings have also gone up. He is paying himself £1000/month to cover his household bills, and £500/month on business expenses, and he knows he should be saving 10% for his tax and accountants bill, so he reasons that he needs to invoice £1700/month to break even. He knows that he can do 30 hours/week of design work, and reasons that therefore he only needs to be billing £13/hour to break even. Even so, he feels as though there is never any money so he starts quoting at £30/hour to try and make a profit.
Let's skip the detail this time: a new customer turns up, and after 3 hours of meetings (taking up 5 hours including travel), 3 hours putting a specification together, 1 hour tweaking and sending it to the customer, and 1 hour discussing it on the phone, he gets a purchase order for his biggest ever job priced at £10k. The customer asked for a discount and Danny, wanting the work desperately, volunteers to do it for £8k.
The customer pays a £3k deposit and Danny catches up on some overdue bill payments.
Three months later, Danny is struggling to find time to finish the work, partly because he's got technical difficulties and partly because he's struggling for cash, having used all the deposit money and having had no time to do other work due to the big job. He's also having to spend time delaying bill payments and trying to do smaller jobs to bring some cash in quickly.
In the meantime the big customer misses an important marketing deadline, and their relationship with Danny sours. He's finally managed to find a bit of motivation, and completes the job, delivering it 1 month late. The big customer has some problems with the work he's delivered, and he spends another 2 weeks getting all the issues sorted out, until finally the customer signs off.
Being friendly and flexible, Danny had no formal contract in place with the big customer, and so when they tell him they will pay a further £2k but no more due to his failure to deliver costing them the missed deadline and missed sales, there isn't much he can do except send out a few angry tweets. Luckily his outburst on twitter goes unnoticed, and he does receive the final payment.
Danny gets another shock when he adds up the time he's spent on the project. Instead of his estimated 330 hours, he's spent just over 650 hours on it. Due to the shortfall of cash while he did the work, he had to spend a further 20 hours dealing with people chasing him for money. He's also had to wait a further 5 weeks and spend 4 hours chasing the final payment.
Total time that wouldn't have been needed if the job did not exist: 674 hours, for £5000, = £7.41 per hour. His break-even mark is £13/hour so you could argue that he's made a loss of £5.58 for every single hour he worked on the project - a total loss of £3762!

Example 3: Danny finally profits, or does he?

Danny has now learned a lot and thinks he's cracked pricing. He now has an assistant and an office so his monthly business overheads have more than doubled to £4k. He reckons that between him and his assistant he can deliver 260 billable hours per month, giving him a break-even cost of £15.38 per hour if they are both fully occupied.
He's even realised that the actual design work is probably just 40% of the overall project time, and has priced it appropriately. With growing expenses but still wanting to be competitive, he's now pricing work at £40/hour, and starts work on a project he's estimated at 600 hours and priced at £24k spread over 4 months.
During the project, his assistant has a week off sick, and a week on holiday, there are 2 bank holidays, and £1300 of unexpected expenses to replace a broken computer and pay an annual bill that had slipped his mind. At the same time, the customer, who has built up a great relationship with Danny, asks very nicely if he could "just add this new requirement in, it's probably just a quick thing". This happens several times throughout the project. The increased business has also given Danny more management and admin work to do; book keeping, wages, looking after the office, so the number of billable hours he can do has decreased.
The project goes well and is delivered on time, and Danny reckons he must have made a profit of 600 x (£40 - £15) = £15k.
However, the holidays and sickness account for 78 lost billable hours, and he's had £1300 of unexpected expenses, and he's only been able to fit in a couple of other small jobs around this big job and he knows those were too small to make a profit. So over 4 months which he reckoned should have 1040 billable hours, he's actually only done 600 at £40. Total business overheads during that time were £16k and so his profit is just £8k - a whole £7k less than he was expecting.
It gets worse; while he was working on this project, Danny wasn't selling or even looking for work, and it takes a further month before he gets more paid work in. That month still costs £4k, which can only come from the profit he made on the last job, so the big project was really only worth £4k in profit, for 5 months of work!

How to Quote for Creative, Design and Development Work - Three Dirty Secrets

Here's what I learned from my time as "Danny", followed by an argument that, actually, this is good for the end customers.

1. The skilled work could be less than 40% of the overall hours:

Here is what you should account for when costing work as a number of hours, on the basis that nothing else is going to pay for this time, and it's time that is required because the job is being done:

time already spent discussing the work and making the sale - meetings, calls, emails

time spent writing a quote - this often requires research, but can take several hours in its own right

time spent delivering a quote and closing the sale - typically a phone call or meeting will be required to talk the customer through it and chase a purchase order

planning the work - writing/drawing a project plan and discussing with staff and suppliers

research - a surprising amount of time may be required to learn about any new methods, technologies or related work that are required for this job

preparing the environment - getting software and files set up ready to work on, and setting up any collaboration tools if you're working with others

doing the work - the more often you get long periods of focussed, uninterrupted time, the less costly this will be

delivering the work - this can take a surprising amount of time, and only experience will teach you which customers will require a lot of time at this stage. It could include installing files on a website, printing, explaining, training, and many other things

maintaining the work - the client will expect to be allowed a few minor changes after delivery, some more so than others. This applies particularly to software development; if you are not charging a monthly maintenance and support fee, you need to account for a good number of hours of bug fixes, maintenance and training in your initial price.

In my experience, the actual "doing" part is often less than 40% of the overall hours. However, that leads us to the next "dirty secret":

2. Customers only want to pay for the "doing" hours:

If you're hiring a plumber, and he charges for 2 hours, you would expect him to spend 2 hours doing plumbing. It's natural to expect that if you're paying for X hours of a skill, that those X hours are spent using that skill. So how do we keep customers happy without going bankrupt?

Lawyers and solicitors have had this worked out for years: they charge for the "doing" hours, but at a higher rate which more than covers the non-"doing" hours!
Let's go back to Danny's last job for a moment. The customer wants to know his hourly rate for the design work, and he knows that the customer is talking about the time he spends on the "doing". Danny knows that only 40% of his time (240 hours) is "doing", and he's priced the job at £40/hour for 600 hours, so the correct rate per "doing" hour, the rate the customer wants to know, is actually £100/hour!
You can use this as a tool; you know it's easy to price up the actual creative work because that's "your thing", so ignore all the rest - simply price up that at 2.5 times the hourly rate you actually want to earn for the hours you have available. Easy!
That leads us on to the last dirty secret...

3. Costing Price and Quoting Price are Different!

Remember when Danny's customer asked for a discount? Danny made the customer very happy with 20% off, but he wouldn't want to lose 20% of his income all the time.
How about the unexpected expenses Danny incurred during his long project?
Nobody else will account for these things, and prices can only be negotiated downwards, so it's important to factor in a number of different things when going from the cost of the hours to the price you quote the customer. Here are some examples:

multiple technologies: does the work you deliver need to be tested on a number of different technologies? For example a modern website will need to work on at least 8 different web browsers and 3 different operating systems. All of this increases the risk of problems during and after delivery. As an example, at my old company we added 30% to the price of any web work that needed to be compatible with Internet Explorer 6 (for the non-techies - a particularly troublesome bit of software).

awkward customers: You'll become more skilled over time at figuring out the "hassle factor" of dealing with a particular person or company - it could be down to bureaucracy, a specific technology, personality, or just lack of knowledge about the work you do, but the point is that in order to deliver a good service, you need to be getting paid for the time and effort you put in. The more clearly you can explain what, how and why you do your work, the less of an issue this becomes.

specification changes: wouldn't it be great for customers if you could handle all those unexpected changes that occur half way through a project? Simply price them in to begin with! As you become more experienced, you'll realise that some customers won't fully know what they want until you start delivering it, and to make them happy, you need to be able to react and adapt to shifting goal posts. If you price the work correctly, that won't be a problem, so make a conscious effort to learn from, rather than grumble about, specification changes.

discount allowance: many customers will immediately try to negotiate a discount once you quote - it makes them feel good, so if you are dealing with a skilled buyer who you know will want to negotiate, add the amount that you're willing to let them negotiate to the price before quoting. The worst case now is that the customer goes away happy and you get the price you wanted, and best case is that you get more money for doing the same job. People don't buy unless they are happy with the price, so there should be no moral issues for you here.

As you can see, this area of pricing is something that requires plenty of experience, great relationships with your customers, and confidence in your own skills and abilities. With practice, it will allow you to set the right expectations, handle unexpected changes, deliver on time and make enough profit to grow your business.

Remind me, why is all this good for customers?

I said at the top of the article that I believe all of this is ultimately good for both parties. Let's first look at what customers want from professional services:

value for money: rubbish is cheap and top quality is not, so if you are the cheapest by a long way, the message you give is that your service is not great. If you are by far the most expensive, the message is that you are too arrogant to care about the customer's budget constraints.

kept promises: customers may try and force deadlines onto you, but you still have to agree to them, so with practice you should be able to meet all of your promises.

show of interest: the customer is passionate about his or her goals, so if you share that passion by learning about what they do and spending time with them, you'll have more influence over and a far better understanding of the requirements, allowing you to deliver a better service and give realistic advice and promises.

expertise: the customer is paying you to do this work because they lack either the time or the expertise to do it themselves, so you need to be good at what you do. By charging enough to make a profit, you can grow your business and expand your expertise and knowledge, becoming more valuable to your staff and customers.

So here is why I think these customer needs are met by the realistic pricing produced by implementing the dirty secrets:

A profitable, stable business that pays you enough to live comfortably gives you more time, less stress, and more credibility.

That credibility reassures your existing customers that you'll always be there for them, and helps bring in new customers by word of mouth.

The lack of stress allows you to get back to being creative; to do the things that made the customers value your expertise in the first place, and to produce consistently higher quality work.

The extra time allows you to spend more time getting to know your customers and their needs, time to keep up with your industry, learn new skills, practice your craft, handle emergencies, and grow your business effectively.

I recently read a superb article about communicating your value by Carrie Foster. Carrie is a management development coach and writes insightful articles about how to get the best out of individuals in an organisation, and this article was aimed at employees who want to get more out of their jobs.
I got thinking about how the same principles apply to small business owners, skilled people who are learning how to turn a skill into a steady, healthy income.
"Surely that's just called sales?" I hear you saying...
The most striking thing about Carrie's article is that it doesn't mention the S word. This is important because you are not a sales person - you're a designer, a programmer, engineer, teacher, consultant, plumber, joiner.
As a small business or one-man-band, you know that the only thing you have to offer is your skill and experience. You also find out slowly and painfully that that's not enough - you have to convince people to part with their hard earned cash, trust you to do a good job, have confidence in your abilities and agree that the price is appropriate.
When I started in business I managed to generate a good amount of business without any marketing- at one point even without a website! (I was a website developer) This implies that I must have been using sales skills, but I rarely saw it this way- people just seem to trust me and want to do business with me. It was only when reading Carrie's article that I realised the crucial distinction between outright selling, and what I had been doing all these years: Communicating My Worth.
"Pure Selling", for the purposes of this article, is trying anything to convince someone to make a decision, pushing them towards that moment, and putting in place things to prevent them from changing their minds.
"Communicating Your Worth" is talking about what you do, in a way that the audience can easily understand, relating it to their specific needs and goals, explaining how it relates to their needs which demonstrates your knowledge, and allowing the person to reach a buying decision themselves.
A great sales person will mix these methods perfectly, and as someone who has had to learn sales the hard way, watching this happen is a truly inspiring experience. However, you are a designer, developer, consultant, engineer, not a sales person, so if you learn to simply and effectively communicate your value, you'll find people will not only want to buy from you, they'll buy into you - recommending you to friends, celebrating your successes and helping you out in hard times. I regard many people who started out as my customers as firm friends, and that has been worth more than any marketing campaign, both financially and in good will.
I want to keep this short and practical, so let's go through the points in Carrie's article, rewritten for a self employed professional:

Create a clear "line of sight" between the customer's goals and your skills - this might mean re-stating what you do in different terms, for example a graphic designer faced with a customer whose goal is to increase sales to young people might say instead of "What do you need me to draw?", something like "Appealing to young people can be done cost-effectively by using of certain types and styles of image, and I have some great ideas on how you can change the brand to reflect that."

Focus on the relevance of your knowledge and potential, and keep your message consistent - in other words, don't try and tell someone you are a 'jack of all trades'; work out what you are best at doing, listen to what people really need, and tell them how your services can, or can't, fulfil that need.

Create regular opportunities for talking to decision makers - perhaps your day to day contact at a particular customer has no real influence, and lacks the influence to communicate your worth to their managers and colleagues. Make sure you take his or her boss out for lunch, or at least meet with them, every so often to discuss what you're doing for them. This gives you an opportunity to make sure it still fits in with their goals and to see if there's anything else you could be doing for them.

Solicit input about and don't be shy about your value - ask current customers what they like and dislike about your service, ask potential customers what they found good and bad about other people they've used in your industry, and make sure your value is being well communicated to the decision makers within your customer's organisation.

Manage upwards - gently coach your contacts to communicate your value upwards in their organisation, making sure your successful delivery of a product or service is recognised. This gives you two lots of free marketing - a recommendation from high-level buyer carries a lot of weight with the buyer's friends and contacts, and it also filters back down the organisation and makes it likely that you'll get business from other people within that organisation.

During review meetings, such as mid-project "move the goal posts" meetings or post-project reviews, or just over lunch with your favourite customer, try to ensure the conversation covers the value you are adding to the customer's business - whether it's directly measurable in new sales, or indirectly in staff happiness.

Market your worth with face-to-face communication, backed up with formal communication. I don't need to explain the value of face-time to any small business owner - meeting your customers in person at least twice is the only way to get and keep a good long term relationship. Backing it up with formal communication is something small business owners often miss - for example a blog, printable and/or printed leaflets and brochures describing the services and products you offer, and real actual printed letters to announce new products and services. Note the absence of emailed mailshots in this list - avoiding that is a personal preference of mine.

Spend time with leaders - whether it's on the golf course, at the pub, or in the board room, it's vital that you set up and maintain a relationship with the people who have the power to authorise your invoices for payment. If you get the relationship right, you will find someone who will mentor you in general business terms and specifically in how to be the best supplier for their organisation. That relationship will often travel with you and and other person as they move into different organisations through their career.

It goes without saying (though I'll say it anyway) that all of these techniques should not be over-used - nobody likes to do business with someone who spends all their time boasting about how great they are, so remember to learn when to temper your passion with a bit of humility and respect.[+]

Or, How to Fail at IT Service Delivery

I recently read a book aimed at improving relationships and began to wonder how the same theory could be applied to business. I'll briefly summarise the book, and then examine how the theory (I will call it a theory even though it's reasonably well proven and makes a lot of sense) could benefit a typical relationship between an IT services company and one of its customers.
After getting over some skepticism, I read "The Five Love Languages". It's aimed at improving long term relationships and I can't recommend it highly enough. In essence, the author boils down his years of marriage counseling into the theory that there are five primary "languages" that humans use to demonstrate love for another human:

Words of Affirmation

Quality Time

Acts of Service

Giving Gifts

Physical Contact

The premise of the book is that most people prefer to "speak" one, perhaps two of these languages, and that in a relationship, if you are speaking a language the other party doesn't understand, you're wasting your time. It's wonderfully practical, easy to implement, and gives rapid, measurable results, which is exactly the kind of technique that appeals to a busy person looking for an easy way to differentiate themselves from the competition.
Business relationships are often jokingly likened to marriage, but behind the jokes are more than a grain of truth - "people buy from people". Any business relationship involves a human customer making a decision to purchase something from a person or company they can identify with in some way. Several studies have shown that adding a "human touch" or otherwise personalising a product or service can boost sales. For an ongoing relationship, after the initial "spark" has passed, there needs to be a mutual need and appreciation in order for the relationship to continue; in business, the initial spark is the first purchase a customer makes, and then later in the relationship, we see customer services issues, complaints, new products, upgrades, contract renewals and all the other day-to-day running of a business relationship.
The type of business relationship I can relate to best is that of IT services, where a customer purchases an ongoing service that probably includes a one-off payment, an ongoing monthly support element, and regular fixed-price quoted work. This is the story of my relationship with a company we'll call Initech, who had a website, a budget that depended on the website's traffic levels, and various projects and upgrades in the pipeline.
I was introduced to Initech when I met their chief executive in a Leeds coffee shop. He was a larger than life character, someone you couldn't help but immediately like. We spoke for two solid hours, me liking the sound of a challenging technical project, him liking my outline of how we should work together, and he described the way the relationship with his existing provider had fallen apart. It was no surprise to me; a vicious circle of increasing demand from the customer, payments being withheld, deadlines missed, decreasing quality of work - a very typical end to an IT supplier's relationship with a customer. We discussed how this often happens and how it can be recognised and dealt with by someone with my experience (and yes, if you can't wait for the ending, those words haunt me to this day).
Quotes and deposits out of the way, setting off on the new, shiny, profitable relationship was a pleasure. I made friends with their previous supplier, made the transfer of the website as smooth as possible, did the basic setup and even fixed a few minor issues in the process. Romance was still in the air, and I barely noticed that the project was taking up a huge amount of time, because it was still new and exciting, and required almost no effort to do the work.
As time went on, as in any human relationship, the romance faded and the cracks began to show. From my perspective, Initech were throwing more and more requests at me and wanting instant responses, changing their priorities depending on the latest whim of their directors, and wanting long phone calls almost every day talking about the same things over and over again. From their perspective, they had lots of ideas that needed discussion and scheduling, pressure from various board members who all had different priorities, pressure to deliver value for the money they were paying, and my contact probably just needed someone to "bounce" off.
The hour-long phone calls began to feel more and more tedious, and I often found myself working on other things, not really listening and hoping I wouldn't get caught out. In hindsight, my contact was probably finding it harder and harder to get a worthwhile response, and so of course he wanted to speak for longer. The vicious circle had started and we haven't even got to the hard bit yet! There were some happy times; when we did what we thought was a minor fix, it could be a major thing for Initech and earned us high praise. When they told us how they appreciated what we were doing and how good things were compared to before, we felt motivated and happy.
Relating it to the love languages theory, I can now see that they felt the most benefit when we dedicated time to talking about and working on their needs (Quality Time), but we were more focussed on delivering what was needed (Acts of Service) in as short a time as possible, to make the cash flow (Physical Contact). Both valid approaches, but mismatched and leading easily to misunderstanding and frustration on both sides.
As time went on, after a few minor updates, the website became unexpectedly successful almost overnight - revenue was up ten-fold within a month, and neither of us knew exactly why, or how long it would last. Naturally they were very happy, and we were highly praised, but this became fairly meaningless to us because there were no financial benefits to us, only more work to do. Again, this led to a mismatch in communication - they wanted us to share in their happiness, and we wanted them to stop giving us more work and get back to normal. Both parties still love the other, but both feel that the other isn't sharing their desires, leading to frustration on both sides (you can see the theme developing here).
Overnight the success went away due to circumstances beyond any of our control, and things went back to normal. This of course generated even more work for us - "why did it go away? why did it happen in the first place? why?", every day "why?". Looking back, I can fully understand it - in their eyes, we were the technical wizards who should understand all of this inside out, so why couldn't we answer their questions? Had I appreciated that, and had they appreciated our situation, we both might have behaved differently.
As in many human relationships, things moved on to the next phase. A shiny new project was born, which would rescue Initech and dwarf any previous success. "MyInitech" was going to be the biggest thing on the web since Facebook; it had everything going for it, and even (drumroll please...) a marketing budget! The romance was back; quotes were sent, generous discounts were applied, purchase orders arrived and everyone was happy once more. My two highly skilled staff relished the challenge and potential Internet-kudos, and for the next two months the office atmosphere was reflected in the happy Electric Six lyrics that peppered the source code. I was very comfortable with my occasional checks on the progress, and eventually allowed demands from other customers to take over all of my own time. Then, with six weeks to go before delivery, everything changed, and looking back, I could easily have stopped stopped it. Within the space of one phone call, the entire mood of the project changed. It was decided that university students would be the primary adopters of the system, and so what was our "delivery date" now became the "go live" date. This is a frequent and fundamental misunderstanding between customers and IT service providers: the supplier thinks 'delivery' means that development and basic functional testing has finished, and the customer thinks it means the system will be fully tested and deployed to their customers. Both are valid; the supplier's aim is to deliver a working system, but the customer's aim is to have their customers using the system. Each party assumes the other shares their goal and both agree a date for that goal.
By changing the meaning of that date, the six weeks remaining for development work suddenly had to include customer-testing, marketing, testing with focus groups that we were supposed to recruit, and the most ridiculous part of it was that I had sat there and happily agreed to all of this. Initech went away from that call happy that they were suddenly going to get a lot more work than was quoted for, and I was happy that they were happy for a few days before realising the size of my mistake. It was too late to change my mind, we had to make it work.
Relating it back to the love languages, I can see that they now needed "Acts of Service" - pure hard work, and we needed "Words of Affirmation" - encouragement and praise. Naturally, as in human relationships, as it became harder for us to work, it became harder for them to encourage and praise us, and the natural outcome of this in a business relationship is that work doesn't get delivered and invoices don't get paid.
Inevitably, the deadline came and went and the product was still not ready. The bulk of the problems were due to the need to support Internet Explorer 6 - shoe-horning a complex, modern web application into 11-year-old buggy software is almost impossible, and probably accounted for 30% of the project development time. Again, the customer had quite reasonably assumed that they were ordering a system that would work on all browsers in common use at the time, and we had quite reasonably assumed that we could, as Facebook recently had, block access from IE6.
The vicious circle was spiraling towards the inevitable conclusion, and over the next few months, with staffing levels reduced, I hacked and bodged the project into an apparently working state and marked it as delivered. During that period, they received some bad news: the recent financial crash (2007) had caused their investors to pull out, leaving them without the marketing budget that was supposed to pay for the project and its marketing. They wanted us to help out with marketing, hoping that the system would "go viral", and so I put together a proposed "apology" for our late delivery, which promised that we would mailshot as many of our friends as possible, which we did. Over the next few months, it became clear that the general public weren't interested in using the system, and that Initech had no intention of paying for the outstanding 60% of the project's value, and yet wanted to continue the ongoing monthly support contract.
Let's say that again, from each side of the fence. We had a customer who we thought had understood our difficulties, had negotiated a 14% discount off the initially quoted price, had shifted the goal posts dramatically near the end of the project, and then awarded themselves a further 60% discount when we inevitably failed to deliver, and then had the gall to expect us to want to carry on the relationship! However, from Initech's side, they had huge pressure on their budget, and a supplier failing to meet expectations that had been agreed, and yet they had a desire to rescue and rebuild the relationship with that supplier over time because they recognised our potential. Rephrased in terms of love, we felt bullied and hurt by them choosing to withhold payment while asking for more work, and for them to want to continue the relationship as if nothing had happened simply amplified those feelings to the point where we hated every second spent dealing with them. For their part, I realise now that they saw us (quite correctly) as a young, inexperienced supplier who needed some "tough love" to blossom into a fantastic supplier, and they tried very hard to make that work - a good example is a long call I had with my contact, in which he took me through a large chunk of his considerable marketing knowledge, hoping that I would use it to benefit both Initech and my company. It was interesting, but really just a waste of his time; I just wanted to get off the phone and back to some paying work so that I could pay next month's bills.
Every time I think back to that experience, I struggle to understand how love given can just amplify feelings of hate. Putting into the love language theory, Initech were demonstrating love by trying to educate us (Quality Time), and wanting us to love them back through Acts of Service. However, we had an immediate need to earn money (Physical Contact), so any Quality Time with them was almost the opposite of what we wanted, and any Acts of Service we could perform for them would again take up time that could've been used to earn money to pay the bills. So love given and expected back was actually received as something hurtful.
Hindsight is a wonderful thing, and looking back with my new-found knowledge, it's clear that a few simple decisions and actions could have turned the relationship, and probably the project, into a resounding success. My only defence for being unable to make that happen is the lack of experience I had at the time, because I firmly believe that it is a supplier's responsibility to speak and understand the customer's language, and the customer should be made to feel comfortable and loved. I'm told a man's greatest need is to be respected, and a woman's greatest need is to be loved, so it feels natural to say that suppliers should make customers feel loved, and customers should respect suppliers, but I think it's a little more complex than that.
Let's review the five love languages and how they can be applied to business relationships:

Words of Affirmation: typically more important to a supplier, because their business is built around making customers happy, and so feedback from happy customers is vital.

Quality Time: typically important to customers, because it makes them feel that the supplier understands them and really wants to get involved in their requirements.

Giving Gifts: given by a supplier, this could be discounts or freebies. Given by a customer, this could be recommendations or introductions to new customers.

Acts of Service: given by a supplier, delivery of a product or service, or more importantly, going the extra mile to deal with customer service issues. Given by a customer, this could be doing something to make life easier for the supplier, whether it's chasing an invoice, pushing back a deadline, or assisting with the delivery.

Physical Contact (or, CASH!): given by a customer, this is cold hard cash - eg. paying invoices on time. Given by a supplier, this could literally be physical - a handshake, a pat on the back, or just a face to face meeting.

My relationship with Initech ended when I told them in blunt, emotionless terms that I'd had enough and their rates were going up 300%. I thought they would surely understand my frustration, and was surprised to find out that it had gone down like a lead balloon. I felt that I was finally free of a stressful and unproductive relationship, and they felt betrayed and let down. It's clear now why that was the case; they thought they had done the right thing and that the relationship could continue, and so of course it was a shock. I'm glad to say that, being somewhat older and wiser than I was, my contact recognised that the end was at hand and became very pragmatic; we agreed and carried out a smooth and organised hand-over to a new supplier.

Advice for IT Service Suppliers

I can't help you avoid all the pitfalls, but do spend quality time with your customer, give them gifts and perform acts of service, but make sure every hour you spend and gifts you give are covered by the amount you charge them, with enough to leave you some profit. This creates positive feedback; they will feel loved and will be only too happy to pay your bills, and you will have a chance to spot any early warning signs of problems before the cash dries up.
If you are working with a smaller customer, for example a new startup, bear in mind that they will find it difficult to give you cash, so consider a profit share if you can afford it, or recommend that they find a student or friend's son or daughter who can afford to spend time on the project for pocket money. The customer is probably an entrepreneur who has huge ideas and no budget, so gently guide them back down to earth, and start with a few simple goals. If they keep changing their minds, don't get frustrated; it probably means they need some quality time with you to help them understand their real goals.
If you are working with a larger, established business, remember that they will have high expectations and be used to paying a high price to have those met. Keep things simple and do a good job - don't charge a low price and promise to meet high expectations, because you will fail. Remember that your main contact probably doesn't understand the full spectrum of your relationship - for example, if you make friends with someone in the accounts dept, it's one less issue for your contact to worry about and produces better results for you.

Advice for IT Service Customers

It's difficult choosing a supplier; generally a cheaper supplier will be less experienced in business, but will give you one highly skilled person, but a more expensive and experienced supplier will give you a larger team of less experienced staff, but be far more capable of managing the relationship and meeting your expectations.
If you choose a cheaper supplier or a "one man band", find out about their background as if you were recruiting them as staff, and try to understand their needs; is cashflow a major problem? are you giving them enough of a technical challenge? Be prepared to work with them and educate them to understand your needs. If their main need is cash, perhaps a profit share would help align their goals with your own. Make sure any deadlines agreed are for the same goal.
If you choose a more experienced supplier, find out about their previous projects and how they were managed. Find out what they can do if there are technical issues, staffing issues, payment problems. Make sure they understand your business model and ultimate goals, and find out what their goals are as a business.
[+]

How often have you seen "Dragon's Den" hopefuls putting ridiculous values on their fledgeling business? They are trying to put a real number on all the passion, blood, sweat and tears that have gone into fulfilling their dream. They're trying to turn something they're 100% devoted to into a real number, and naturally the numbers that come out are enormous. But as we've seen, that's not the same value that others will apply to it.
"Value" is a relative term - it really means "Value to a specific person in a specific set of circumstances". Many years ago, after one of life's inevitable down turns, I found myself completely skint; owing cash to a local thug and buying food with rubber cheques that, thanks to a wonderful invention called a cheque guarantee card, the bank would honour. As you can imagine, a five pound note had far more value then compared to now. However, that's nothing compared to this incredible lesson in value: one red paperclip
100 years ago, most businesses were in or associated with manufacturing, and could be valued using their balance sheet because most of the value would be in assets - stock, buildings, machinery and debtors. A service business such as a web design or marketing agency has almost no hard assets - a few laptops perhaps, and so the only items of value on the balance sheet are the debtors (which should be low) and cash (which is normally low). The value of that business is its intellectual property, knowledge, skill and ability - none of which appear on the balance sheet.
At this point we're going to make a bold assumption - that the principle owner of the business has very little day to day involvement in the delivery of the services. For a young creative business, this is almost never true. For an older business, if this is true, then you should consider it a serious problem - one that I've had a lot of experience with and will write about in detail soon.
I recently had the privilege of reading a paper about creating companies based on collaboration and not hierarchy by Doug Poretz (not currently public, sorry!), a model which is slowly gaining traction in modern creative companies. In the paper, the issue of valuing these intangible assets was the biggest problem in getting away from a traditional business model, because the future value of a business is the most important figure for its shareholders. However, I don't think it's a complex problem; I believe we already have a measure of the value of your intellectual property and skills - your profit. Consider any service business, and provided it is a working business, those assets translate directly into profit, and usually into recurring profit. For example:

Software Developer: skill and experience become a packaged product which becomes profit

even the dreaded Patent Troll: a portfolio of patents are licensed to others and become profit

The only time this doesn't hold true is for a new business or one with newly acquired intellectual property. The value there is in future profit, with, of course, its associated risks. In this case, the value is very subjective and difficult to pin a figure on.
So far so good; we've found a monetary figure that is directly related to the value of your skill, experience, and intellectual property, but it's not the "value" - value depends completely on the potential buyer. Let's consider some of these buyers:

A competitor wanting to put you out of business - value could be based on the expected increase to their business.

A merger with a similar business - value could be a multiple of monthly or annual profit.

A strategic purchase to gain skills or intellectual property - it's unlikely that the business would continue as before, so all the value here is in the future profit that the buyer can get from the skills or intellectual property. That makes the value highly subjective - perhaps calculated as the amount the seller expect to lose, rather than the amount the buyer expects to gain.

A venture capitalist - value could be a multiple of profit, but also based on future resale value - again, highly subjective especially as the seller is likely to be highly involved in the business, and therefore involved in generating that future resale value.

Now consider one more factor in all this - perceived value. Suppose you have a business that has a relatively low value if you look at profit and loss, but it has a patent, or has built some software, or an exclusive license of some kind. These are things which a buyer can see as potential future profit, and so they have a value based on how much profit the buyer thinks they can become, and how much cash they can risk to access that profit.
[+]